Gambling on a dotcom bubble

All businesses are dotcoms now, but is it fuelling a new bubble asks Matt
Warman

Online takeway service Just-Eat eyes £1.2bn float

By Matt Warman, Head of Technology

7:00AM BST 30 Mar 2014

What does it take for a US dotcom business to be worth $1bn? Looking back at the past year or so, the answer seems to be around a dozen employees, two prototype products but no finished ones, and several million as-yet-unmonetised users. Comparing those three Facebook acquisitions – Instagram, Oculus and WhatsApp respectively – the only thing one can say conclusively is that a business model appears to be entirely optional. Did someone say bubble?

On this side of the Atlantic, things look rather different. Just Eat, which is set to float next month for as much as £1.5bn, uses the web and a mobile app to link hungry consumers with local takeaway restaurants; it has already had to convince consumers to part with a lot of cash for their dinners. Little matter that not all of them will have been wholly sober, because Just Eat has also done much of the harder task of convincing restaurants that they too should sign up with their service rather than a rival. This is not to say that British businesses are, uniquely, more tangible than their US counterparts. But it is to wonder what shape this bubble is really taking.

A few things are certain. First, it’s not a dotcom bubble because all businesses are dotcoms now. Find me a business that doesn’t appear to need a digital plan and I’ll show you one that’s privately panicking about not having one.

More importantly, however, all these firms and all those who seek to acquire them are scrambling to work out what the future looks like. The reason for ludicrously inflated valuations is that big businesses and large venture capitalists alike are prepared to take knowing gambles in the hope that the start-ups they buy turn out to be the next big thing. It doesn’t matter that most of them won’t be because hitting the jackpot offers such enormous rewards that it will wipe out all memory of other failures. And even if large amounts of money are being spent on companies that are simply part of a scene, they potentially buy the acquirer a toehold in the new landscape.

Related Articles

Pleasingly for British investors, Just Eat looks at least to be a very real business. It accounts for half the online takeaway business in this country and has seen revenues rise by 70pc in just a year. It is likely to trade at a ratio that is some 100 times current earnings.

The company will raise some £100m primarily to fund acquisitions: one of those last year was on Birmingham’s Meal2Go, which offered a rival service and a clever point of sale system popular with restaurants. Just Eat gobbled up a competitor and gained unique technology. Which should remind investors of two more things: the internet tends to monopolies, and those, whether they are Google or Facebook or Spotify or Twitter, often emerge through acquisitions. So the old adage that users are always just a click away from another website isn’t the whole story. Today’s dominance funds the acquisitions that secure the future.